Jan. 4 (Bloomberg) -- Starbucks Corp., the world’s largest
coffee chain, will miss out on a surge in home-brewing unless it
can break a 13-year-old deal that ties its fortunes to Kraft
Foods Inc.’s slow-selling Tassimo machine.

Under the terms of the deal, Starbucks can’t put its coffee
in the Keurig Home Brewer, according to a complaint from Kraft
filed in federal court in White Plains, New York. Kraft’s
brewing system has 2.6 percent of the grocery market; Keurig,
which dominates the U.S. market for machines that make single
cups of coffee in a minute or less and is owned by Green
Mountain Coffee Roasters Inc., has 71 percent.

“Starbucks is losing its addressable market by the day,”
Philadelphia-based Pinheiro said in a telephone interview.

In November, Starbucks Chief Executive Officer Howard
Schultz announced plans to terminate a deal under which Kraft
distributes Starbucks coffee products to U.S. grocery stores.

Kraft says Starbucks can’t end the deal unless the world’s
largest coffee chain compensates Kraft for the “fair market
value” of the packaged coffee business. On Dec. 6, Kraft filed
a complaint in the U.S. Southern District of New York, seeking
to prevent Starbucks from taking any further action toward
ending the partnership.

New Technology

In 1998, when Starbucks and Kraft first agreed to work
together, the single-cup brewer was a relatively new technology.
The machines use disposable cups or pods of ground coffee to
dispense a cup of coffee. Starbucks was selling coffee pods that
fit into a conventional espresso machine (the company has since
stopped selling the machine and still sells pods), and Keurig
sold brewers solely to offices.

When Keurig prepared to enter the home-brewing market in
2002, it sought investments from coffee companies, said Nick
Lazaris, who was CEO at the time. Canadian coffee company Van
Houtte Inc. invested $10 million in Keurig, and Green Mountain
Coffee Roasters, the first brand to sell its coffee in Keurig
pods, acquired a 41 percent stake in the company for $14 million
(it bought the rest of Keurig for $104 million in 2006).

Starbucks, which at the time was focused on acquiring
chains and opening stores worldwide, didn’t invest in Keurig.

‘Like Intel’

While Nestle, Kraft and Procter & Gamble Co. all got into
the coffee pod business, Keurig grabbed the biggest market share
in the U.S. by positioning its $250 brewer as a gourmet product
and by giving consumers lots of choice, Lazaris says. Today
Keurig brewers sell for about $100 and up.

Though competitors sold just a few brands of coffee, Keurig
licensed its K-Cups for dozens of specialty coffee purveyors,
such as Tully’s, Van Houtte and Timothy’s, and let different
manufacturers make Keurig-style brewers, earning a royalty off
each sale. It also included a special K-Cup that consumers could
fill up with their own favorite ground coffee.

“We wanted to be like Intel,” former CEO Lazaris said in
a telephone interview, meaning Keurig would be a technology
present in multiple brands. It prevented consumers from
“feeling cornered,” Lazaris said.

‘Share Erosion’

In the 52 weeks ending Oct. 31, the single-cup market,
which excludes instant coffee, generated almost $200 million
worth of U.S. sales, according to SymphonyIRI Group, a Chicago-based firm that tracks supermarkets. While that is 5.2 percent
of the overall coffee category, single-cup coffee sales are
growing 28 times as fast as the overall coffee market.

Even before publicly announcing his intention to pull out
of the Kraft deal, Schultz had privately expressed his concerns
to the Northfield, Illinois-based food maker.

“We cannot accept the continued share erosion and lack of
progress we are experiencing down the grocery aisle,” Schultz
wrote to Kraft CEO Irene Rosenfeld in an e-mail provided to
Bloomberg News by Starbucks.

Determined to expand its grocery business, Starbucks has
been putting its marketing muscle behind its own single-serve
product, Via Ready Brew. A soluble powder sold in individual
packets, Via requires no brewer and is simply dissolved in hot
or cold water.

‘Grand Scheme’

For the 12 months ending in October, Via generated $16.8
million worth of sales in U.S. groceries, according to
SymphonyIRI. During the same period, Green Mountain K-Cups alone
rang up $72 million in U.S. grocery sales.

“In the grand scheme of things, it doesn’t look like Via
is going to make a great deal of impact on the coffee category”
in the U.S., said Jim Hertel, managing partner at Willard
Bishop, a Barrington, Illinois-based retail consulting firm.

Starbucks expects Via to turn a profit in 2011, Chief
Financial Officer Troy Alstead said during a Nov. 4 investor
call, with the biggest opportunities overseas. Including sales
in both Starbucks retail locations and grocery stores, the
company sold $135 million worth of Via worldwide in the past
year, Alstead said.

Starbucks’ agreement with Kraft limits exclusivity only to
grocery stores, meaning the company can sell any single-serve
system in its own stores or with specialty retailers such as
department stores, Alan Hilowitz, a Starbucks spokesman, said in
an e-mail today. Hilowitz declined to provide the contract,
citing a confidentiality agreement.

“We are looking forward to providing Starbucks customers
with more ways to enjoy Starbucks coffee, one cup at a time,”
Hilowitz said via an e-mailed statement on Dec. 29.